At the End of Its First Year of Operations on December

question 65

Essay

At the end of its first year of operations on December 31, 2016, the GAC Company reported taxable income of
$30,000 and a pretax financial loss of $40,000. Differences between taxable income and pretax financial income included estimated bad debt expense for which accounts were expected to be written off in 2017, $20,000, and warranty costs expensed for accounting purposes in excess of cash paid for warranty claims, $50,000. The warranty costs are expected to be paid in 2017. The enacted tax rate for 2016 and 2017 is 30%.
Required:
a. Prepare the income tax journal entry for the GAC Company on December 31, 2016, assuming that it is more likely than not that the deferred tax asset will be realized.
b. Prepare the income tax journal entry for the GAC Company on December 31, 2016, assuming that it is more likely than not that 40% of the deferred tax asset from the warranty costs will not be realized.

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Definitions:

Deming Management

A comprehensive management approach proposed by W. Edwards Deming, focusing on quality improvement, increased productivity, reduced costs, and customer satisfaction through statistical methods.

Everyone's Job

A principle suggesting that a specific task or responsibility is shared among all members of a group or organization.

Run Chart

A graphical tool used in process improvement that displays observed data in a time sequence to identify trends or patterns over time.

Manufacturing Defects

Imperfections or errors in a product that occur during its manufacturing process, resulting in a departure from intended design or function.